RBA Signals Potential for More Easing - MUFG

Derek Halpenny, European Head of GMR at MUFG, notes that the RBA today
released its quarterly monetary policy statement and perhaps after
easing its monetary policy stance this week, we should not be surprised
to see some notable downgrades to inflation projections going forward.

Key Quotes

“What
is perhaps surprising was the extent of the reductions to inflation
forecasts. Just three months ago, the RBA was forecasting an underlying
forecast range of 2%-3% for this year. That forecast is now 1%-2%.

Even
in the year to June 2018, the inflation rate only gets back to
1.5%-2.5%, again below what three months ago was the forecast for this
year. These updated forecasts also of course incorporate the action
taken by the RBA this week and that has helped fuel expectations that
further easing may be required. The 2-year government bond yield is
11bps lower today and a massive 48bps lower from the recent high on 26th
April just before the Q1 inflation data was released.

Clearly
the markets and the RBA under-estimated the downward pressures on
domestic price pressures that currently prevail. AUD/USD is another
example of the US dollar now looking under-valued based solely on rate
spreads. The move in 2-year yields in Australia has taken the spread in
Australia over the US to a cyclical low and points to further AUD/USD
weakness.”